Question

1. Suppose that Americans decide to increase their saving. As a result, the real interest rate will (Rise/Fall) , and U.S. net capital outflow will (Increase/Decrease) .

2. If the elasticity of U.S. net capital outflow with respect to the real interest rate is very low, this increase in private saving will have a (Large/Small) effect on U.S. domestic investment.

3. If the elasticity of U.S. exports with respect to the real exchange rate is very high, this increase in private saving will have a (Large/Small) effect on the U.S. real exchange rate.

Answer 1

(1)

Americans decide to increase their saving:

If Americans decide to increase their savings, this would result in a fall in the real interest rate and the \(U S\) net capital outflow will increase.

(2)

If the elasticity of U.S. net capital outflow with respect to the real interest rate is very low, this increase in private saving will have a large effect on U.S. domestic investment. This is because since the elasticity is low, now there won't be much of capital outflow and thus most of it can be used for domestic investment.

(3)

If the elasticity of U.S. exports with respect to the real exchange rate is very high, this increase in private saving will have a small effect on the U.S. real exchange rate.